Question

Cindy Richards, the manager of Rockford Company, was deliberating over an offer for an order requesting 7,000 boxes of birthday greeting cards. Rockford was operating at 70% of its capacity of 30,000 boxes and could use the extra business. Unfortunately, the order's offering price of $7.75 per box was below the cost to produce the cards. The controller was opposed to taking a loss on the deal. However, the personnel manager argued in favor of accepting the order even though a loss would be incurred. Accepting the order would avoid the problem oflayoffs and would help maintain the community image of the company. The full cost to produce a box of birthday greeting cards is provided below. The total fixed manufacturing costs would not change if the order is accepted. ROCKFORD COMPANY COSTS TO PRODUCE ONE BOX OF BIRTHDAY GREETING CARDS Direct Materials 2.00 Direct Labor 3.00 Variable Manufacturing Overhead 1.50 Fixed Manufacturing Overhead Total Full Manufacturing Cost 9.00 2.50 The order is from a customer in a region not ordinarily serviced by the company. No variable selling or administrative expenses would be associated with the order. REQUIRED: (1) Assume that the company would accept the order only if it increased total profits. Should the company accept or reject the order? Provide supporting computations. Consider the personnel manager's concerns. Discuss the merits of accepting the order even if it decreases total profits. (2)

Answer 1

Solution 1. Total Capacity Current operations 30000 boxes 70% 21000 boxes 9000 boxes 7000 boxes Un-utilised capacity= Offer order Statement showing Contribution from Offer Particulars Amount Offer price (A) 7.75 Less: Direct Materials 2.00 Direct Labour 3.00 Variable Manufacturing Overheads 1.50 Total Variable expenses (B) 6.50 Contribution per unit (A-B) 1.25 No of Boxes offered 7000 Contribution on 7000 boxes= $1.25 x 7000 boxes $8,750.00 Fixed Manufacturing Overhead is a allocated cost and irrelevant in computation as we are using the un-utilised capacity to produce the offer. If the offer is accepted, it will increase the contribution by $8,750. Thus, company should accept the offer. Solution 2. Personnel Manager's concerns The Merits of accepting the offer are that: 1 It would help in building company's image and goodwill, which will result in long run growth of the company. 2 As the order is from a region which is not ordinarily serviced by the company and if boxes are supplied in that area it will result in exploration of new markets and buiness opportunities

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